Watch bond markets clues for other major markets
Abraham George Market Musings
In the last few months, I have been arguing for major turns in all the major asset classes that we follow namely equities, bonds, dollar, and gold. The Dow made a low of 28,725 on Sep 30 but closed at 34,590 last Wednesday. It is only 6% shy of closing above the all-time high it made on Jan 04 2022 at 36,800.
In just a few weeks gold has made a spectacular move up of 11%. The dollar looks much weaker after having fallen 8 % from its top. But the biggest clues for all other markets lie in the bond markets. After touching a high of 4.34% in the ten-year yields in September the market closed below 3.5% on Friday.
On Friday most of us were looking for a weaker or rather subdued payroll number. We did not get that. It came much stronger than street expectations and so the equity markets sold off initially but recovered to close above the 200-day moving average in the S&P 500.
After falling 85 points in under two months in 10-year bond yields one should have expected the yields to rally much higher on a strong payroll number. But what happened by the end of the day was rather surprising. After an initial flurry with higher yields, the 10-year yields reversed track completely and closed at the lowest level since Sep 20, 2022.
What does this imply? The Fed controls only the Fed fund rates or the very short end of the markets. The ten-year yield which is the barometer for most business pricing is controlled by the markets.
After the Fed got its inflation expectations completely wrong they went on a rampage in raising rates from 0 to 3.75% in 8 months. While the Fed has many responsibilities one of its most unwritten responsibility is to provide a smooth functioning of the economy. That is not what has happened in the last eight months. They failed to anticipate inflation or failed to act on it in a timely manner. Instead, they panicked which resulted in the mortgage rates moving from 2.75% to 8%. This has created serious damage to economic activity and may even force the country into a recession.
The leads and lags in the economy may take some time to show up but the ten-year yields are anticipating a weaker CPI when it will be released on Dec 13th. If we get a weaker CPI and Powell sticks to his word on slowing down on future interest rate rises, we should still continue to see equities higher. How high can it go? It is hard to tell. As Ed Seyokota said, “ The trend is your friend until the end when it bends.”
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office, and a hedge fund.